United States v. Novak

• Decision Date: 09 November 2016
• Docket Number: 15–3601,Nos. 15–3589 &amp,s. 15–3589 &amp
• Citation: 841 F.3d 721
• Parties: United States of America, Plaintiff–Appellee, v. Anna F. Novak and John C. Morrison, Defendants–Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

841 F.3d 721

United States of America, Plaintiff–Appellee,

v.Anna F. Novak and John C. Morrison, Defendants–Appellants.

Nos. 15–3589 &

15–3601

United States Court of Appeals, Seventh Circuit.

Argued September 28, 2016

Decided November 9, 2016

David J. Reinhard, John W. Vaudreuil, Attorneys, OFFICE OF THE UNITED STATES ATTORNEY, Madison, WI, for Plaintiff–Appellee.

Charles L. Hawkins, Attorney, CHARLES HAWKINS LAW, Minneapolis, MN, for Defendant–Appellant Anna F. Novak.

Mark Jon Wieczorek, Attorney, WIECZOREK LAW FIRM, LLC, for Defendant–Appellant John C. Morrison.

Before Posner, Flaum, and Manion, Circuit Judges.

Flaum, Circuit Judge.

Defendants-appellants John Morrison and Anna Novak both pled guilty to distributing a controlled substance analog and to tax fraud. The district court accepted their guilty pleas and later sentenced Morrison to forty-eight months of incarceration and Novak to ninety-six months. They now appeal, challenging the constitutionality of the Controlled Substances Analogue Act, 21 U.S.C. § 813 (the Analogue Act), the district court's acceptance of their guilty pleas, and their sentences. We affirm.

I. Background

From approximately November 2009 through September 2013, Morrison and Novak sold substances they referred to as “herbal incense” from their retail store, JC Moon, in Ashland, Wisconsin. These substances included XLR–11, UR–144, PB–22, and 5F–PB–22, which at the time were not listed on the controlled substance schedules but were similar to scheduled controlled substances. Between November 2012 and July 2013, undercover law enforcement officers made twenty-eight controlled purchases of various substances from JC Moon.

Through undercover interviews with Novak, the government learned that appellants hid a significant portion of their cash income from the IRS. Novak directed JC Moon employees to take all $50 and $100 bills from the cash registers and put them in Novak and Morrison's safe. These bills never went into JC Moon's business bank account. This artificially low business income information was provided to the appellants' tax preparer; as a result, the “skimmed” cash was not included on the returns and not reported to the IRS. From 2010 to 2012, appellants under-reported JC Moon's business income by approximately $575,752 for a tax loss of $186,095.

On December 10, 2014, a federal grand jury returned a thirty-five-count indictment against Novak and Morrison. These counts included the Analogue Act and tax fraud counts to which Novak and Morrison would eventually plead guilty.

On May 5, 2015, Novak and Morrison moved to dismiss the thirty indictment counts alleging either conspiracy or substantive distribution charges. Appellants argued before the district court that the Analogue Act was unconstitutionally vague as applied to XLR–11 and several other analogues involved in the case. On July 24, 2015, the court denied Novak and Morrison's motion to dismiss.

On August 27, 2015, Novak and Morrison pled guilty to one count each of distributing a controlled substance analogue—XLR–11—and to tax fraud. The plea agreements were unconditional and did not reserve the right to appeal the previously-denied motion to dismiss.

At Morrison's change of plea hearing, the district court reviewed the maximum penalties and asked whether Morrison understood the proceedings. The government then summarized the evidence it would submit at trial on the Analogue Act charge, including employee and customer testimony that appellants sold synthetic marijuana as “herbal incense” from a back room at JC Moon; a Facebook post indicating that appellants sold XLR–11 after they knew it was scheduled to be treated as a controlled substance;^* undercover agent testimony regarding a May 2, 2013 XLR–11 purchase; expert testimony demonstrating the physiological-effects and chemical-structural similarities between XLR–11 and JWH–18, a controlled substance; and lay witness testimony from JC Moon customers regarding the effects of XLR–11. Morrison then agreed that the government could have proved all of the above facts.

When questioned, both appellants vacillated between knowing and not knowing that XLR–11 was similar to controlled substances while they were selling it. When the court first asked Morrison to explain the distribution offense in his own words, he said,

I didn't realize I was being charged with anything because I didn't think there was anything wrong with [the XLR–11] at the time. Because every time that something came down, we always stopped and ... I didn't know. I'm sorry. I really didn't know it was illegal.

Morrison then said that he knew that people used the XLR–11 he sold to get high, he “thought it was like marijuana,” and he knew marijuana was a controlled substance. However, when questioned further, Morrison stated that he did not know that XLR–11 was a controlled substance when he sold it and that he stopped selling it once he believed it became a scheduled controlled substance.

In response, the government said that XLR–11 was in fact not a scheduled controlled substance as of the date of the charged offense, May 2, 2013. Rather, the evidence showed that Morrison knew that XLR–11 would be treated as a controlled substance later that same month, yet continued to sell it after having that knowledge. The government continued,

Mr. Morrison's forthright answers that he knew people were smoking, it means he knew it was for human consumption. He knew they were using it to get high, which we had a lot of proof of that and I knew he would say that, and then his acknowledgement that he thought it was like marijuana, a Schedule 1 controlled substance, I think is sufficient.

One of the things McFadden [v. United States , ––– U.S. ––––, 135 S.Ct. 2298, 192 L.Ed.2d 260 (2015) ] tells us is you can prove knowingly ... by showing that the defendant knew the characteristics that would make it illegal even if he did not know its legal status as an analogue.... I would submit ... that there are facts, circumstantial facts that he knew it produced a high. It could give rise to an inference. The Court could infer ... that he then knew enough—that it would be an analogue even though he doesn't know its legal status as an analogue.

The district court concluded,

I'm satisfied that there's a factual basis for the plea, despite Mr. Morrison's denials of the specific knowledge of the chemical involved or its specific legal status. But I think on the theory that [the government] described that ... Mr. Morrison was familiar with the features of the products that he was selling that made them controlled substance analogues, ... there is indeed a factual basis for the plea.

Morrison also initially seemed unsure about how his tax reporting worked. He was not aware of how much money JC Moon made in 2012 or how much business income it reported. He also said the he was unaware of the cash-skimming operation underlying the tax fraud. However, after speaking with his attorney, Morrison said, “We put the fifties and hundreds in the safe as a separate, and ... the taxes were made out the way they were, I signed them and I'm guilty of it.” Morrison also said that he and Novak gave their business income information—without including the $50 and $100 bills—to their tax preparer, and that Morrison signed the return. The court questioned Morrison on his ability to raise lack of knowledge as a defense to the tax fraud charge. Morrison responded that he knew and that he nevertheless wanted to plead guilty.

The court concluded,

despite Mr. Morrison's denial, I think there is a factual basis ... because of his knowledge of the treatment of the fifties and hundreds at the store, that he knew that the tax return that he signed was not an accurate tax return and that it understated the income ....

The district court conditionally accepted Morrison's guilty pleas pending a review of his presentence report.

The district court then proceeded with Novak's change of plea hearing. The court reviewed the maximum penalties and ensured that Novak understood the proceedings. The government noted that evidence from Morrison's change of plea hearing applied to Novak. Novak was present at the defense table during that recitation and waived a proffer of the same evidence at her hearing, which took place directly after Morrison's. Novak agreed that the government could prove everything from Morrison's proffer. Then, like Morrison, Novak expressed some hesitation about the distribution charge. Novak initially said she thought XLR–11 was supposed to be tobacco, but then later realized it was not. Novak also stated that she did not know people smoked the substances sold at JC Moon.

After speaking with her attorney, Novak said she later learned that people were smoking the herbal incense, but that people were interested in its “relaxing effect.” When asked if she knew that people used the substances to get high, Novak responded, “I don't like to use that terminology. [I]t affects everybody differently. Some it would relax; some would go to sleep; some would buzz ....” Novak later admitted that JC Moon sold XLR–11 after Novak knew it had effects similar to marijuana.

When questioned about the May 2, 2013 Facebook post, Novak said she was out of the state and did not create the post but that she was “aware of a date coming up, this particular, and our wholesalers would say [XLR–11] is going to be banned and so we just posted that instantly, not knowing it was going to come back at us.” The district court then found that there was a sufficient factual basis for accepting Novak's guilty plea on the distribution charge.

Regarding the tax fraud charge, Novak admitted that she knew the $50 and $100 bills were not reflected in the information she gave to the tax preparer, and that therefore the tax returns reflected fraudulently low business income. The court found that there was a sufficient factual basis for Novak's plea. The court conditionally accepted Novak's pleas pending a review of the presentence...